Schedule K-1 Form 1120-S

[mmgaeta]

My husband owned shares in a family corporation which he inherited from his aunt. All the assets of the corporation (farm land) were sold and the corporation was dissolved. We received a Schedule K-1 for 2022 which is marked as the Final K-1. It has entries in Box 2 (loss), Box 9, Box 16 (code D), and Box 17 (code AC). I'm trying to input the information in TurboTax and have several questions. I check the box 'This corporation ended in 2022'. Then it asks how you disposed of this S corporation. The options are: I sold it outright (complete dissolution), I sold it and am receiving payments, I disposed of it but not by selling it, and None of the above. If I select I sold it outright (complete dissolution), then TurboTax is counting the sales price and the amount from the K-1 and doubling the income on my return. Which option should I select? Then because Box 2 was a loss, TurboTax brings up form 7203 and says to fill in the information. I'm not sure what to fill in on this form. I also don't know where to enter the cost basis value from when my husband inherited this from his aunt. Any help with this will be appreciated!

[Anonymous_]

Did your husband liquidate his interest in the S corporation in the same tax year the shares were inherited?

With respect to inheriting S corporation shares, there can be an issue with inside basis and outside basis (unlike a partnership, the two cannot usually be equalized).

I will page @Rick19744 for further input on the preceding sentence.

[mmgaeta]

No, my husband inherited the shares many years ago when his aunt passed away. He has been receiving a K-1 all these years with the rental income. He didn't personally liquidate his interest. All the assets were sold, the proceeds distributed to the shareholders, and the corporation dissolved.

[Rick19744]

As is usually the case, pass-through entities can get complicated quickly regardless of the size of the entity.

Additionally, it compounds when there is a sale.  I will provide some comments:

• An S corporation does not pay tax at the entity level (this is true 98% of the time, but doubt your facts fall into that 2%).  The income / loss passes through to the shareholder(s) and the tax is paid at the shareholder level.
• A shareholder in an S corporation must track their tax basis in this investment.  This is done annually by updating the tax basis schedule for the applicable lines on the K-1.
• Your beginning tax basis was the FMV of tax basis (interest) of your aunt's in the year of inheritance.  Then you should have adjusted / updated this every year as noted above.
• Now that you have a disposition event, you need to provide TT with some additional information.
• Since your facts indicate the sale occurred at the entity level, don't get hung up on semantics during the input stage.  The goal is to arrive at the correct gain and tax.
• I'm not sure what additional questions come up if you choose "disposed but not by selling it" or "none of the above".  
• Ultimately you want to be able to provide TT with two additional pieces of information; the selling price and your cost basis (which is your tax basis).
• The selling price would be the liquidating distribution your received from the S corporation.
• When updating your tax basis for the final K-1 amounts (applicable lines), if the final K-1 reflects any distribution, do not adjust your tax basis by this figure.  Liquidating distributions from an S corporation should be reported on a form 1099-DIV; so not sure what occurred in your situation.
• There should not be any double tax if handled correctly.  The gain on the sale at the entity level being reported on your final K-1 will be taxed at the shareholder level, but this also increases your tax basis; so no double tax.
• This is somewhat complicated and you may want to get some professional help so you file a complete and accurate tax return and the gain on the S corporation is correct.

[mmgaeta]

• You're right, this is very complicated! We were not aware that we should be updating the tax basis each year. My husband's aunt died in 2002. We have the K-1 forms from 2010 to present, but he's not sure if he has the earlier ones.
• TT is reporting the sale of the property on form 4797 (Part I). In box 2a it enters 'From K-1' in box 2a and in box 2g it enters the value from K-1 box 9. The other boxes on line 2 are blank. Even if I enter a value for stock basis on form 7203 it doesn't seem to have any affect.
• We only received the K-1 form and did not receive a 1099-DIV.

Thank you for your response!